Is the RBA profligate or prescient?

The Reserve Bank of Australia’s decision on Tuesday to once again pre-emptively lower its cash rate to the April 2009 crisis trough of 3 per cent, which was flagged here on 14 November, will force savings and borrowing rates around the country towards, or below, their record lows.

While the RBA Governor, Glenn Stevens, acknowledged on Tuesday that “the full effects of earlier measures are yet to be observed" he said that “the Board judged that a further easing…was appropriate now…to foster sustainable growth."

The RBA’s Deputy Governor, Dr Phillip Lowe, was spied by the Australian Financial Review casting an eye over allegedly cautious consumers in a Westfield shopping centre over the weekend.

Assuming banks shunt on the full RBA cut to depositors, and say 0.2 percentage points to borrowers, the average Australian bank deposit rate will decline to just 3.25 per cent, which is down from a post-2008 peak of 5.25 per cent (see chart).

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The average “online" deposit rate will have shrunk from 7.3 per cent to just 3.05 per cent, which is actually below the levels attained during the global financial crisis.

And the average “special" bank deposit rate, which have been popular products in recent times, will have crashed from a post-2008 high of 7.95 per cent to around 4.15 per cent, based on RBA data.

Accordingly, savings rates will barely cover the cost of living for many retirees given core inflation has expanded at a 2.8 per cent pace over the six months to September.

Many savers will legitimately ask the question: why has the RBA seen fit to slash rates by a total of 1.75 percentage points since November 2011 when Australia’s economy has been officially growing at a robust “above-trend" rate and the jobless rate remains low?

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Rather than wait for reliable empirical proof on the state of the economy, the RBA has been gambling that it is ahead of the game based on its subjective forecasts and partial activity indicators.

Given the RBA has lowered its cash rate by a full 100 basis points since May, it could have waited to see the results of the all-important September quarter GDP data on Wednesday, the October jobless survey on Thursday, and the fourth quarter inflation data in January.

Instead, it is backing its own judgment that the economy will experience a major downturn in the absence of extremely easy monetary policy.

Dr Nicholas Gruen argues the RBA should not make cash rate decisions moments prior to critical data releases, such as GDP and unemployment.

“To make an important decision a day before a regular data release may be regarded as a misfortune. To make it two days before two data releases looks like carelessness" he says.

“Even if board members require a rigid monthly timetable, the RBA’s current schedule seems almost wilfully perverse – exquisitely mistimed. Would it be too much for the bank and the official statistician to co-ordinate their activities?"

While Australia’s savers have been beaten mercilessly by Australia’s jumpy central bank, borrowers are making out like bandits.

As the second chart shows, the cost of the average discounted variable home loan rate will have fallen from its 2008 high of 8.95 per cent to 5.7 per cent (assuming only 20 basis points of pass-through).

The price of 3 year fixed-rate loans are already at their lowest levels since electronic records began.

There are signs easy monetary policy is lubricating the economy. Home loan approvals (excluding refinancings) have been expanding at a double-digit annual rate since May, according to the ABS. In fact, the number of new loans approved in September was the highest since February 2010 in seasonally-adjusted terms.

House prices also appear to be climbing again while share prices have boomed with total returns of around 15 per cent since the year began.

Only history will judge whether the RBA has fallen captive to the very vocal cheap money lobby, or whether our monetary policy mandarins have proven prescient yet again.